Significant amendments to Alberta's insurance legislation came into effect on July 1, 2012. In this article, we discuss two issues relevant to lawsuits between underwriters and their insureds, which are affected by the amendments.
Time to Sue
Under the previous version of Alberta's Insurance Act (the old Act), Statutory Condition 14, contained in Part 5, Subpart 3 (Fire Insurance), required an insured, in the event of a dispute, to commence an action against an insurer within one year of the occurrence of the loss or damage forming the subject matter of the action. Statutory Condition 14 in the old Act stated as follows:
"ACTION 14 Every action or proceeding against the insurer for the recovery of any claim under or by virtue of this contract shall be absolutely barred unless commenced within one year next after the loss or damage occurs."
Aside from the one-year limitation period contained in Subpart 3, above, the old Act was silent as to limitations on actions by insureds against their insurers under any other form of property-loss insurance contract. Thus, for contracts insuring perils other than fire, the Alberta Limitations Act would govern the applicable limitation period, which, in effect, meant that insureds could arguably commence actions against their insurers up to two years after the date the insurer denied their claim.
There was also debate about whether the one-year limitation period was effective given the periods prescribed in the Alberta Limitations Act. Unlike the old Act, Alberta's newly amended Insurance Act (the new Act) does not make a distinction between fire insurance contracts and other property-loss insurance contracts. The new Act does, however, distinguish between property and non-property-loss insurance contracts. Under the new limitation on actions section, contained in section 526(1), insured persons must commence actions in respect of loss or damage to insured property no later than two years after the date of the loss or damage. Section 526(1) in the new Act states as follows:
"An action or proceeding against an insurer under a contract must be commenced
(a) in the case of loss or damage to insured property, not later than 2 years after the date the insured knew or ought to have known that the loss or damage occurred, and
(b) in any other case, not later than 2 years after the date that the cause of action against the insurer arose."
The two-year limitation period in section 526(1) applies to all insurance policies issued in Alberta other than life insurance policies, accident and sickness insurance policies, and reinsurance policies.
Changes to Division of Recovery in Subrogated Actions
Both the old Act and the new Act contain provisions regarding the division of the proceeds of a subrogated action. These provisions are designed to address situations where an insurer makes a payment to an insured in respect of a loss covered by a policy, and where there is recovery from a third party through an action or a settlement, which is insufficient to provide full recovery to the insured of the insurer's portion of its loss after costs of recovery are deducted.
Under the old Act, division of recovery was governed by section 553, contained in Part 5, Subpart 3 (Fire Insurance), and it stated as follows:
"If the net amount recovered after deducting the costs of recovery is not sufficient to provide a complete indemnity for the loss or damage suffered, that amount must be divided between the insurer and the insured in the proportions in which the loss or damage has been borne by them."
Section 546(2) of the new Act incorporates very similar, albeit slightly different, language regarding division of recovery. Section 546(2) of the new Act states:
"When the net amount recovered by an action or on settlement is, after deduction of the costs of the recovery, not sufficient to provide complete indemnity for the loss or damage suffered, the amount remaining must be divided between the insurer and the insured in the proportion in which the loss or damage has been borne by them."
These division of recovery sections provide that the amount remaining after costs are deducted is to be divided between the insurer and the insured in relation to the proportion to which they bore the risk of loss.
Under the old Act, division of proceeds was required only in fire insurance policies. The portion of the old Act applying to contracts insuring other types of perils was silent on the matter of division of proceeds. Thus, under the old Act and in the absence of contractual language mandating division of recovery, for a loss other than one due to the peril of fire, there was no statutory formula governing division of recovery as between the insurer and the insured. Under the new Act, however, division of recovery is required in respect of all contracts of insurance other than life insurance, accident and sickness insurance, and reinsurance.
Which Version of the Insurance Act Applies to You?
As discussed above, the differences between the old Act and the new Act are significant. Determining whether the old Act or the new Act applies to the current policy/claim could affect both the applicable limitation period, as well as the requirement to divide recovery as between the insured and underwriters.
Thus, there should be consideration at the outset whether the old Act or the new Act applies to a policy. The regulation governing the transition from the old Act to the new Act (Transitional Regulation (Insurance Amendment Act, 2008 – Part 5)) (the Transitional Regulation) does not squarely address the changes to the division of recovery provisions in the old Act and the new Act. Given the potential uncertainty as to whether the old Act or new Act will apply to a dispute, and given the lack of judicial direction on this point, it may be contentious.
The authors acknowledge the contribution of Caroline Smith, Student-at-Law.